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Monday, March 7, 2016

Selecting a Legal Structure for Your Business

Starting a business requires prospective entrepreneurs to make
hundreds of different decisions before opening their doors to customers.
One of the most important decisions is selecting the right legal
structure for your enterprise. The manner in which you choose to
organize will impact your taxes, personal liability exposure, and
fundraising options.

Sole proprietorships are the most common
arrangement for people who work alone. This structure is a popular
choice because it is the easiest to arrange and does not require any
filings with the state. One of the biggest disadvantages of the sole
proprietorship, however, is that entity does not exist apart from the
owner. Consequently, the owner is personally liable for all financial
obligations and damages resulting from lawsuits filed against the
company. Another disadvantage is that it can be difficult to raise
capital. Banks are reluctant to make loans to sole proprietorships,
leaving the owners to rely on home equity loans or borrowing from
family.

For enterprises with more than one owner, a partnership
might be a good arrangement. Each partner contributes capital, labor, or
expertise in order to turn a profit. The partners share in the profits,
but like a sole proprietorship, they are also personally liable for
debts and damages. One way in which partners can reduce personal
exposure is by forming a limited partnership. This form consists of
general partners who make decisions and assume the risks and limited
partners with no control in the operations in exchange for reduced
liability. Tax treatment is one of the main reasons this arrangement is
selected. Profits and losses are passed through to the individual
partners.

Limited Liability Companies, or LLCs, are a type of
structure that is becoming very popular. This structure creates an
entity separate from the owners. As a result, the owners are not liable
for debts or judgments against the venture. Unlike a limited
partnership, all members are free to participate in the management and
enjoy protection from personal liability. LLCs also enjoy pass through
taxation. However, the tax rules for these structures are complicated.
The amount of paperwork is a huge hurdle, and members must file articles
of organization with the Secretary of State or sign an operating
agreement.

The right structure for your business depends on a
number of different factors unique to your enterprise. For example, a
small boutique selling handmade cat collars will obviously have less
risk and perhaps less revenue than a company that provides window
washing services to high-rise office buildings. Prospective
entrepreneurs are advised to contact their attorney or accountant in
order to discuss the taxation and liability consequences of the
different entities. A number of free or low-cost resources to help you
make your decision are available from your local chamber of commerce,
Small Business Administration, or volunteers with the Service Corps of
Retired Executives.

Selecting the organization for your business
is one of the most important decisions you and your partners will make.
Research all of the available options and seek advice from experienced
professionals before making your selection.